Defence and Security Procurement

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Mr. Jenkin: Let us suppose that we are involved in an Anglo-US project such as the joint strike fighter or perhaps something that is less obviously a partnership agreement, but which would involve American transfer of sensitive information. Would it be possible for the European Court of Justice to insist that it is not in the interest of our essential security that we should fail to disclose that information as part of a European tendering process? Is there some protection for sensitive American information, so that it can somehow be exempted from the purview of the European Court of Justice?
Mr. Davies: As the hon. Gentleman no doubt knows, Ministers are not supposed to give legal advice. Let me give a political answer to that highly hypothetical and theoretical question. I cannot conceive a one in a billion or one in 10 billion chance of such an eventuality. If anything is essential to our national security, it is indeed that very important relationship with the United States on procurement of the joint strike fighter. Everyone knows about that, and it is a good example of something that would—if anything would—be essential. Thus I cannot conceive of the danger that the hon. Gentleman suggests. I do not believe for a moment that anyone in the United States supposes that there is such a danger, nor can I believe that anyone in the European Union—which I know the hon. Gentleman does not like—could possibly have such a perception of what might eventually ensue.
Mr. Jenkin: I am grateful for that fulsome assurance, but the Minister admits that there is a one in a million chance, because in the end the European Court of Justice will decide, not him or anyone on this side of the channel, so it is not an assurance that he can truly give, is it?
Mr. Davies: The hon. Gentleman must not distort what I said. When I said there is not a one in 10 billion chance, I meant that there is not a chance up to at least one in 10 billion, so he cannot say that I acknowledged that there is a one in a million chance. That is pure distortion of my response, and I must insist that it is properly corrected in Hansard.
Mr. Burns: As the Minister knows, the Government believe that the directive should not explicitly authorise or outlaw offsets. What is the position?
Mr. Davies: The position on offsets is that we prefer to leave the matter unmentioned in the directive. We see no reason to mention it and think that there are considerable dangers in doing so. We may want flexibility in that area. We do not want to be pressed into some kind of standardised Procrustean model for an offset arrangement. Our preference is to leave the matter out. I hope that that is indeed how the directive will finally emerge from the co-decision procedure.
Mr. Burns: But of course, the Minister knows that the Government also want continuing work by the European Defence Agency on the matter. What sort of work?
Mr. Davies: The European Defence Agency is a useful body, although it may be possible to exaggerate its practical importance in current circumstances. We think that it is usefully employed in many ways, one of which is in looking at the impact of a directive of the kind that we are considering. We hope that the European Defence Agency’s conclusions on the matter will be helpful to our position.
Mr. Burns: The noble Baroness Taylor of Bolton, in her letter, did not say that it is useful to look at all issues. She said that she expects the European Defence Agency to carry on “ongoing work” on offsets. What sort of work, and to achieve what?
Mr. Davies: Since the offsets are of great interest to the hon. Gentleman, let me give a slightly more detailed response.
Mr. Burns: Just answer the question.
Mr. Davies: The hon. Gentleman will get the answer, but he will get it in the context in which I think he needs it. There is a wide range of views among member states on the matter, ranging from Germany wanting a directive to outlaw offsets, through to Greece and the Netherlands, which feel that offsets are a necessary evil to enable market penetration from smaller member states. The French position, in the presidency, is to avoid opening up difficult debates at this late stage that could risk agreement on the directive being reached by December. The UK policy view is that offsets are a market-distorting practice that should be dispensed with. The UK industry view is that if EU member states are prohibited from offering them, but the United States and other competitors can still include them in their bids for contracts, EU industry will be disadvantaged. However, offsets are a global phenomenon and other practices also impact on the effectiveness of the market, so a holistic approach needs to be taken. It follows that it is unlikely that a text on offsets will feature and we are happy with that outcome.
Mr. Burns: Baroness Taylor mentioned “ongoing work” on offsets in the EDA. What work is that, precisely?
Mr. Davies: I have not seen any particular report on the work that the EDA is doing. I cannot predict what the outcome of its work will be. We shall look at its work with great interest. I have no reason to suppose that anything it says will change the position, which is just as I have outlined it.
Mr. Burns: May I ask an easier question? Baroness Taylor says that “ongoing work” is taking place on offsets. What is that ongoing work?
Mr. Davies: The hon. Gentleman is asking me questions that I am not competent—and should not be competent—to answer.
Mr. Burns: But you are the Minister.
Mr. Davies: If there was work being done by the British Government, I would be the right person to ask about it. However, the hon. Gentleman asks about work being undertaken by the European Defence Agency. I would not expect member states to be given any report on that work until it was concluded. If it were sending out an interim report, we would no doubt see it, but I have not seen one. If there were such an interim report I would be happy for the hon. Gentleman to ask me, in the usual way, to give an account of what it said.
Mr. Hands: May I take the Minister back to something that his boss said last month about wanting to deepen EU co-operation through the creation of an EU fighting force? Will he outline some of the benefits and disbenefits of the proposal for greater EU co-operation on an operational basis?
Mr. Davies: My right hon. Friend said nothing about creating an EU fighting force. If the hon. Gentleman reads the existing treaties—the treaty of Amsterdam or the prospective Lisbon treaty—he will see that there is no reference to any such thing. Of course, we are all committed to sensible, productive, pragmatically attractive and fruitful co-operation with our EU allies, whether in the area of procurement or in an operational context. The directive merely deals with procurement—the rules for net procurement by national member states or their Governments—of defence and related equipment.
Dr. Murrison: On a different subject, may I bring the Minister on to subcontracting, which is of particular importance to the United Kingdom, given the sheer number of small and medium-sized enterprises that we have, which knock spots off Germany, France and Italy combined? I hope the Minister is particularly mindful of their needs, especially in the current climate.
Subcontracting exercised the European Scrutiny Committee, which asked us to consider the implications of the directive on subcontracting. Articles 13 and 38 would place burdens on tenderers in stipulating their use of subcontractors. The EU presidency wants further provisions allowing contracting authorities to require prime contractors to subcontract up to 30 per cent. of the main contract. That would reduce the ability of prime contractors to mange and it is difficult to see how it would be helpful to the UK. Before I put my question, may I point out that the noble Baroness Taylor, in her letter of 21 October, which is in the bundle, admits that the articles as drafted would not bring benefits to SMEs? She states that she is willing to “tactically...concede” to other member states. What is the Minister’s attitude towards those articles, and is he willing to concede them tactically, to the disadvantage of British SMEs?
Mr. Davies: I am not willing to concede anything that is of disadvantage to British SMEs. If I may respectfully say so, I think the hon. Gentleman has misunderstood his own brief, because he started by talking about imposing burdens and then correctly read out a quotation that used the word “enabling”. This is an enabling proposal. It will enable lead contractors to tender for subcontracts, not compel them to do so. It is permissive, not restrictive, and it would not be logical or sensible for us to be particularly concerned about it.
Dr. Murrison: So to what extent does the Minister anticipate prime contractors acting in a way that I suppose the Commission would see as perverse, by choosing sub-contractors in the country with which they have contracted? One imagines that such an artifice might be positively attractive to some, and possibly even to the UK, given the number of SMEs that it contains.
Mr. Davies: I repeat that this is an enabling measure. I cannot predict the extent to which individual member states or their prime contractors might wish to take advantage of it.
Dr. Murrison: Let me get this clear. The Minister says that he supports an enabling measure that will give prime contractors permission to let up to 30 per cent. of their main contract to subcontractors. Is that the burden of what he is saying?
Mr. Davies: I have said three times to the hon. Gentleman that this is an enabling measure, which is permissive, not prescriptive. I suggest that he reread the text. Of course, subcontracts have to be competed for openly. The same rules apply to subcontracts as to other defence contracts under the directive.
Mr. Hands: May I take the Minister back to the comment in his opening statement that one Mediterranean country had its provisions on firemen’s hats changed, or something like that? Which country was it, and was it forced to make that change as a result of EU action?
Mr. Davies: I do know which country was involved, and it was firemen’s hats, but there was no case before the European court, for the reason that I explained earlier. No one has been found guilty of cheating, abuse or a breach of article 296. It is difficult for me to accuse someone of having been in breach of the article when there has been no legal judgment. The hon. Gentleman is frowning, but he will be familiar with that convention, which exists throughout civilised society. We do not say that someone is guilty of an abuse, or of something that could result in a court judgment, if there has not been such a judgment. There has not, for the reason that I have outlined. By its own admission, until 2006 the Commission was not policing the matter thoroughly, and people were getting away with some pretty extraordinary anomalies. The firemen’s hats and the T-shirts were just two examples of that. If he does not mind, I shall not pillory or name and shame the country involved—
Mr. Burns: Then why mention it in the first place?
Mr. Davies: The hon. Gentleman asks a question from a sedentary position. I suppose that he is allowed to do so, and if I am allowed to answer, I will do so happily.
I mentioned the case because it illustrated the regime that existed between 1957 and 2006, when article 296 was not being policed effectively by the Commission. By definition the article was not being examined by the European Court of Justice, as no one was bringing cases of abuses of it. Against the background of what one might call relative anarchy, a number of precedents were produced that other member states might have followed, thinking that they were what the practice of the market had become under the original text of the treaty. That was exactly the evil that the Commission was addressing by bringing forward the directive. I hope that the hon. Member for Hammersmith and Fulham, and the hon. Member for West Chelmsford, who asked me the question from a sedentary position, are both satisfied by that answer.
Mr. Hands: I am not really satisfied by that answer. If the Minister uses an example, it would be worth knowing which country is involved. If that was the regime for those 50 years, it would also seem relevant to know whether that provision has been abolished since 2006 in relation to that member state.
Mr. Davies: As the hon. Gentleman is concerned about this matter I recommend that he look at the Commission’s communication of 2006. It is clear from that communication that if such an issue arose today, if some member state tried to procure firemen’s hats—to take that example, but there could be other equally silly examples and I am sure that there are many other equally glaring abuses—the Commission would challenge it. Therefore, the rules would be enforced. This directive has the purpose, which I think it achieves, of creating a new, explicit framework that is separate from the public procurement directive and the original treaty and deals in much greater detail with all these issues and the various eventualities that can ensue.
Mr. Hands: I am still not sure that I fully understand. Is the Minister saying that all contracts prior to 2006 are effectively grandfathered so that nobody could challenge any of the provisions to a contract that has already been made in relation to firemen’s hats or whatever it might be?
Mr. Davies: No, I am not saying that. Let me try to help the hon. Gentleman. It is quite normal that prosecuting authorities set out from time to time the principles on which they will operate. They may well decide to take a stricter view of enforcement in a particular area than they have in practice done before. It does not mean that anybody has been given legal immunity for actions which pre-date the new guidance. Under the analogy that I put forward, the Commission’s communications can be looked at as a sort of prosecuting authority’s guidance. It must be perfectly open, legally, to the Commission to pursue some really egregious abuses that come to its attention now and which pre-date 2006. But that is a matter for the Commission. It would not be for us to take the initiative there.
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Prepared 25 November 2008